Abstract: This dissertation studies the following topics in the business cycle literature: the persistence properties of business cycle models, the estimation of dynamic stochastic general equilibrium models and the roles of structural shocks. These topics are studied in order to take business cycle models to data and see their plausibility. Firstly, I investigate the persistence properties of an RBC model with consumption habit and capital adjustment cost. I use spectral analysis due to its advantage of providing a good summary of the temporal behavior of economic variables. It turns out that introducing capital adjustment cost lowers the heights of the model spectra at all frequencies due to lower variances. Consumption habit moves the peak of consumption spectrum towards too low frequency. The benchmark model whether calibrated or estimated, could not generate any significant peaks at 4-5 year business cycle frequencies. Secondly, a version of New Keynesian models is investigated that features Calvo-style sticky price/wage with various rigidities and structural shocks similar to Christiano, Eichenbaum and Evans (2005) and Smets and Wouters (2003). The model is estimated by the MCMC algorithm of Bayesian methodology with a particular effort to lower the price stickiness parameter estimate to be consistent with microeconomic evidence. For this purpose, I introduce an assumption of the endogenous elasticity of demand to the model of the above authors as an additional source of real rigidity, which successfully lowers the duration of average price to about 2.2 quarters. The estimated model also mimics well the spectral peaks shown in the U.S. aggregates. However, the model has a difficulty in explaining inflation inertia. The dilemma is that it is hard to capture both the inertial behavior and the volatility of inflation at the same time with the model. Finally, impulse response and variance decomposition analyses show that the price markup and the labor supply shocks turn out to be important in accounting for the variations in the real variables. The key thing is that these shocks produce the right correlations among the endogenous variables.

In this dissertation, I present three essays on international business cycles. In the first essay, I document the empirical regularities of international business cycles using the OECD Quarterly Data, and review the existing literatures in this field. By checking the data, I point out 1) net exports-output ratios both in nominal and real terms are countercyclical before 1990 for most of the OECD countries, 2) but the ratios changes their signs from negative to positive after 1990 for some of the countries, and 3) the main reason for the sign changes is that there are changes in the relationship between exports and output: exports were weakly correlated with output or were lagged with output before 1990, but exports become strongly correlated with output and also coincident. In the literature review part, I suggest that many of the properties of international real business cycles can be accounted for by benchmark international real business cycle models, such as Backus, Kehoe and Kydland (1992) and subsequent literatures, but those models cannot account for the coexistence of procyclical and countercyclical net exports. Further, incorporating Bansal and Yaron (2004)-style multi-factor productivity with short-run (trend-stationary transitory) shocks and long-run (difference-stationary growth) shocks are promising in order to account for the new observation about the trade variables. In the second essay, I document that the correlation between net exports and output has not always been negative after 1960. For the G6 countries, most of the countries experienced countercyclical net exports before 1990. However, some of these countries, including Germany and Japan, experienced procyclical net exports after 1990 even though they experienced countercyclical net exports before that. I also show that a simple one-good two-country business cycle model with a multi-factor productivity process can explain the phenomena. A positive transitory shocks to productivity leads to a positive response in net exports because its consumption risk-sharing effect, which causes a international resource flow from Home to Foreign country, is larger than its efficiency effect, which causes an increase in investments in Home country by importing goods form Foreign country. On the other hand, a positive growth shocks to productivity lead to a negative response in net exports because its consumption risk-sharing effect is smaller than its efficiency effect. I estimate the stochastic productivity processes for the G6 countries by using the simulated method of moments, and the simulation results of the model based on the estimated parameters are able to account for the changes in net export dynamics from pre-1990 to post-1990 for Germany and Japan. In the third essay, I document that there are changes in the correlations about trade variables and capital flows for the G7 countries: 1) the magnitude of the contemporaneous correlation of exports with output is a half of that of imports with output for pre-1990, but the former is almost the same value as the latter for post-1990, 2) the magnitude of the contemporaneous correlation of real net exports-output ratio with output is significantly negative for pre-1990, but it becomes almost zero or weakly positive for post-1990. I present two types of two-country two-good real business cycle models, one of which is with complete financial markets and the other one is with incomplete financial markets model in a sense that only risk-free one-period bonds are traded. I also add two types of shocks, transitory and growth shocks, to these two models in the spirit of Aguiar and Gopinath (2007). Firstly, the standard complete financial markets model has a strong correlation of exports with output and a weak correlation of imports with output. Secondly, the standard incomplete financial markets model has a weak correlation of exports with output and a strong correlation of imports with output. Finally, with reasonable changes in model parameter values, both the complete and incomplete market models can account for the two empirical regularities above, but only the incomplete market model can account for the empirical regularities for pre-1990. I evaluate these models in light of cross-country correlation properties based on actual data, especially the cross-country consumption correlation anomaly. I show that the incomplete financial markets model is still better than the complete market model because the cross-country consumption correlation in the incomplete financial markets model is still larger than but closer to the cross-country output correlation compared with the case of the complete financial markets model.

In contrast to mainstream economics, complexity theory conceives the economy as a complex system of heterogeneous interacting agents characterised by limited information and bounded rationality. Agent Based Models (ABMs) are the analytical and computational tools developed by the proponents of this emerging methodology. Aimed at students and scholars of contemporary economics, this book includes a comprehensive toolkit for agent-based computational economics, now quickly becoming the new way to study evolving economic systems. Leading scholars in the field explain how ABMs can be applied fruitfully to many real-world economic examples and represent a great advancement over mainstream approaches. The essays discuss the methodological bases of agent-based approaches and demonstrate step-by-step how to build, simulate and analyse ABMs and how to validate their outputs empirically using the data. They also present a wide set of applications of these models to key economic topics, including the business cycle, labour markets, and economic growth.

This dissertation analyzes business cycles and international asset pricing under disaster risk. In the first chapter, I use annual consumption and financial data for 31 countries over 140 years and I document that developing countries exhibit a more volatile consumption and a significantly larger equity premium. By employing a Bayesian Markov Chain Monte Carlo approach, I estimate an empirical model of macroeconomic disasters - low-probability events with disastrous consequences such as the Great Depression - in developing and high-income countries. I find that developing countries have a higher overall probability of entering a disaster and that they are also much more likely to enter an individual disaster such as a sovereign debt crisis. Disasters in high-income countries are shown to be shorter, on average, but more severe and uncertain. Group heterogeneity in disaster parameters allows me to generate a substantial equity premium for both groups of countries. Disaster contagion plays a vital role in explaining the equity premium puzzle for high-income countries. The model-simulated correlations of equity premium within each group of countries are qualitatively in line with data. The second chapter provides evidence that the U.S. stock market returns not only exhibit large negative skewness, but that they also provide poor payoffs during deep consumption recessions. Using out-of-the-money S&P 500 index options, I obtain a hedged risk premium and show that the hedged risk premium captures the equity risk premium during normal times. I isolate the disaster risk premium as the difference between the total equity risk premium and the hedged risk premium. In addition, I illustrate that the risk premium due to disasters explains about eighty percent of the total equity risk premium. In the cross-section of stock returns, I find that stocks that are more negatively related to the disaster risk premium yield considerably higher subsequent returns. However, this finding is not robust to adjusting for Fama-French price factors. I also find a little predictive power of the disaster risk premium with respect to the aggregate stock market returns due to the lack of autocorrelation in the disaster risk premium. The third chapter recognizes the importance of a large informal economy for business cycles in emerging countries. I show that a two-sector real business cycle model of a small open economy with a poorly measured informal sector, Cobb-Douglas utility function, and country spread fluctuations accounts for the low volatility of hours worked and large relative volatility of consumption to output in emerging countries. Due to the non-separability between consumption and labor supply, the model cannot explain the countercyclical real interest rates and trade balance that prevail in developing countries. The results suggest that GHH preferences are necessary to generate countercyclical real interest rates and trade balance in a neoclassical setting with working capital constraint and exogenous movements in real interest rates.